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Where is the US economy headed?

 
 
georgeob1
 
  1  
Reply Thu 1 May, 2008 01:19 pm
Advocate wrote:


The best thing not to have happened during the Bush administration is that we did not privatize Social Security, as Bush wanted.

Had we done so, baby boomers facing retirement over the next few years would be even worse off than they are now. Now they're struggling with pension plans worth less than they counted on, and home values that are tanking.

At least they can rely on a monthly Social Security check.

...
So imagine if boomer retirees didn't have Social Security.

Sure, the stock market has done well over the past half century. But there have been decades like the 1970s and this one so far, where it's been a disaster. That's why we have Social Security -- so that if your timing is bad and you get caught in a downdraft, you still have something to fall back on in retirement. If we had privatized, you'd have nothing to fall back on. You'd crash.


Perhaps true, but you have left out most of the significant facts. I suppose that from a mathematical perspective the problem is one of comparing the anticipated Social Security benefit with stock market returns in an arbitrarily selected period over some century or so - more precisely, determining the likelihood of average stock market appreciation exceeding the growth in SS benefits over the selected period. A lot depends on the period selected and its length. As Advocate has said there have indeed been a few ten-year periods during the past century during which average stock market returns have been low -- however there have been very few such periods, and the odds of beating SS returns in any arbitrarily selected decade are very high indeed - it is a very good bet. Moreover as the comparison period gets longer (as do retirement expectations) the favorable odds get better and better.

On average the stock market is a far better bet - the statistical expectation is much higher. We assume SS provides a better worst case scenario, based on our unbounded faith in the government. However if the stock market tanks for a long period the government finances will also be affected.
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georgeob1
 
  1  
Reply Thu 1 May, 2008 01:28 pm
Cycloptichorn wrote:
I challenge your assertion that SS monies would be greater if privately invested. I don't believe you have any evidence to back up that position; and what more, you are completely ignoring the fact that many investments lose money. SS does not lose money, even if the growth rate is smaller then other investments.

The fact that our governments have been stealing money from SS to help make the deficit look smaller has nothing at all to do with the SS program; it is merely a trick of accounting. There IS money in the fund; in the form of gov't loans, which will have to be paid off by other parts of the US gov't sooner or later.

Cycloptichorn


SS fund returns are, at best, a theoretical device since the government simply issues bonds in return for the cash collected in the tax - as you noted. The return rate is what is established in those federal bonds.

Don't have the time or energy to research the subject, but I believe there are many analyses out there that clearly establish, based on past data, that SS funds invested in the stock market at market rates of return, since SS was established, would have yielded a much greater current fund balance than what the Federal Bonds provided.
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okie
 
  1  
Reply Thu 1 May, 2008 02:27 pm
Thomas wrote:
okie wrote:
I have, dys, but the point is that a large majority of people consider it their retirement fund, and if anyone threatens the program, the Democrats always accuse the Republicans of destroying the peoples retirement. So you need to tell your favorite politicians to inform the people.

Well, for the sake of discussion, let's say Social Security disappears overnight. How do you think that would improve the overall retirement situation?

Obviously it wouldn't help, because it is a supplemental retirement income. It was sold as supplemental, not a stand alone retirement fund, but unfortunately this fact is conveniently forgotten in the political rhetoric. It is not uncommon for Democrats to characterize retirees as suffering and having to live on a Social Security check that is increased a tiny bit each year. If the increase is meager, Republicans are demonized, but the question is never asked people about why they don't have something to help support them besides the SS check.

Meanwhile, for example, a smoker could save a few thousand per year, add compounded interest over a period of 40 years, and you end up with a few hundred thousand from which to draw a pension. My point, where is the personal responsibility questions asked? After all, this is a free country, but along with freedom comes a responsibility. I understand there are misfortunes, but those are provided for.

Finally, given the current situation, I am not in favor of scrapping Social Security, but I am in favor of some reforms, and I am in favor of separating the fund from the general fund more distinctly and managed properly. Also, we have yet to see the total impact of Social Security on our economy as the ratio of workers to retirees dereases. So it seems to have been a success so far, but the full story of its success is yet to be told.
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Thomas
 
  1  
Reply Thu 1 May, 2008 02:35 pm
georgeob1 wrote:
Don't have the time or energy to research the subject, but I believe there are many analyses out there that clearly establish, based on past data, that SS funds invested in the stock market at market rates of return, since SS was established, would have yielded a much greater current fund balance than what the Federal Bonds provided.

That's true, and it's easily explained. When Social Security started, the benefits it paid out to the first generation of recipients hadn't been funded by payments from earlier generations. Those payments were in effect financed with federal debt. Seventy years later, the federal government is still paying interest on this debt. Because the government doesn't account for it separately in its income statements, it shows up as a reduced return on the retiree's investment. All of this is well understood.

The question is, what are we to do about it? One could abolish Social Security, sure, and the generation that currently pays into the system could switch to private retirement accounts. But that would deplete the funds that pay for the current pensions, leaving you with only two choices: (1) Disown the current generation of Social Security recipients -- which did pay into the system, and would rightfully feel betrayed by such a move. Or, (2) you could pay difference out of taxes. In this scenario, the current generation of workers gets higher returns on their retirement funds, but also pays extra taxes by about the same amount.

So yes, Social Security yields a sub-standard return on investment. But the alternative of privatizing it makes barely any difference to the taxpayers' expenses.
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cicerone imposter
 
  1  
Reply Thu 1 May, 2008 03:49 pm
The problem with social security and Medicare is the simple fact that most income earners who have paid into social security will take out more than they have contributed, and added to that "burden" is the simple fact that congress has approved both benefits for people, such as the handicapped, to receive benefits without ever having paid into the program.

FYI, I've already received more in benefit than I've paid into social security and Medicare. The biggest problem our government faces is when the baby-boomers begin to withdraw their benefits, the work force to back up their payments will be greatly reduced.

The government budget office tells us there's enough fund to support the system till 2041, but as with all government programs, I doubt their guesstimates to be accurate.
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Advocate
 
  1  
Reply Thu 1 May, 2008 04:24 pm
cicerone imposter wrote:
The problem with social security and Medicare is the simple fact that most income earners who have paid into social security will take out more than they have contributed, and added to that "burden" is the simple fact that congress has approved both benefits for people, such as the handicapped, to receive benefits without ever having paid into the program.

FYI, I've already received more in benefit than I've paid into social security and Medicare. The biggest problem our government faces is when the baby-boomers begin to withdraw their benefits, the work force to back up their payments will be greatly reduced.

The government budget office tells us there's enough fund to support the system till 2041, but as with all government programs, I doubt their guesstimates to be accurate.


People should get back more than they put in. After all, your employer paid an equal amount into the system, and there were imputed earnings on all this while the government had the use of the money. I am not aware that disabled people who didn't contribute can get benefits. Is that true?
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Ramafuchs
 
  1  
Reply Thu 1 May, 2008 04:24 pm
Aside from the topic let me air my views.
Projecting the commercial,consummate consume oriented captialist system is facing a slow steady death..

THE ECONOMIST on May12th 2001 has this words.

Job mobility isa very low, but
Gypsies follow success models.
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dyslexia
 
  1  
Reply Thu 1 May, 2008 04:38 pm
Advocate wrote:
cicerone imposter wrote:
The problem with social security and Medicare is the simple fact that most income earners who have paid into social security will take out more than they have contributed, and added to that "burden" is the simple fact that congress has approved both benefits for people, such as the handicapped, to receive benefits without ever having paid into the program.

FYI, I've already received more in benefit than I've paid into social security and Medicare. The biggest problem our government faces is when the baby-boomers begin to withdraw their benefits, the work force to back up their payments will be greatly reduced.

The government budget office tells us there's enough fund to support the system till 2041, but as with all government programs, I doubt their guesstimates to be accurate.


People should get back more than they put in. After all, your employer paid an equal amount into the system, and there were imputed earnings on all this while the government had the use of the money. I am not aware that disabled people who didn't contribute can get benefits. Is that true?
Yes it is true, SSI benefits are often paid to those unable to work (or have ever worked) ergo to pay into the system, SSI also includes Medicaid.
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Ramafuchs
 
  1  
Reply Thu 1 May, 2008 05:28 pm
Germany has learnt something from the past.
And Germany will revive Marshal plan to help USA.
I mean USA needs some help.
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hamburger
 
  1  
Reply Thu 1 May, 2008 05:48 pm
in canada , the CPP (canada pension plan) started to diversify its investments some years ago and now is quite heavily invested in equities .
generally speaking , the returns have been quite good - despite some lean years .
from my point of view , the advantage is that my pension does NOT depend on the current investment rate of return , but is based on my contributions to the fund . so even if there are lean periods , i still receive my pension . on the other hand , my pension does NOT increase if the fund generates more income than required to pay the pension (pensions are increased periodically based upon the rate of inflation ) .
while there was a great fear some years ago that the fund would run dry , the fund has now been declared sound based upon certification of independent actuarial consultants .

so it seems that a government administered pension fund can be operated quite succesfully - and the pensioners need not run the risk of making foolish investment decisions and losing their shirt .

of course , people are still free to make additional investments in whichever way they want , but at least a basic pension is provided on a sound basis .
hbg

reference :
CANADA PENSION FUND
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georgeob1
 
  1  
Reply Thu 1 May, 2008 07:12 pm
Thomas wrote:
So yes, Social Security yields a sub-standard return on investment. But the alternative of privatizing it makes barely any difference to the taxpayers' expenses.


I see your point about the start up costs for the first generation of beneficiaries who themselves didn't pay into the system for a full term. However, my impression is that, even on a revolving basis, a market return for an arbitrary period equal to the average working lives of the participants would yield something better than the bond yields, based on actual market data for the past 60 years.

With respect to your statement above -- I don't get the meaning of what you wrote. I see the point about a substandard ROI, but I don't know what you mean by "..barely any difference to the taxpayer's expenses."
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okie
 
  1  
Reply Thu 1 May, 2008 07:20 pm
cicerone imposter wrote:
The problem with social security and Medicare is the simple fact that most income earners who have paid into social security will take out more than they have contributed, and added to that "burden" is the simple fact that congress has approved both benefits for people, such as the handicapped, to receive benefits without ever having paid into the program.

On the flip side, ci, many people pay in that never receive a dime if they die before retirement age, so the fund works like an insurance policy for all citizens, which was the intent.

Quote:
FYI, I've already received more in benefit than I've paid into social security and Medicare. The biggest problem our government faces is when the baby-boomers begin to withdraw their benefits, the work force to back up their payments will be greatly reduced.

The government budget office tells us there's enough fund to support the system till 2041, but as with all government programs, I doubt their guesstimates to be accurate.

Have you figured compound interest growth from the time you started contributing, ci? Also, when the government says it is funded until 2041, that is true that they have collected enough money for the iou's to cover it until then, or there will be enough wage earners at current rates to fund it until then, but the truth is the money is gone, all of it, it has been spent.
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dyslexia
 
  1  
Reply Thu 1 May, 2008 07:27 pm
"compound interest" now there's a concept that only okie could wrap around his pea-picking head as an original thought; perhaps okie you need to explain "compound interest" to C.I. and meself as we are just not hep to such intimate knowledge as you possess, could you also explain such concepts as "dividends" "earnings" and most especially "capital gains"?
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okie
 
  1  
Reply Thu 1 May, 2008 08:34 pm
dyslexia wrote:
"compound interest" now there's a concept that only okie could wrap around his pea-picking head as an original thought; perhaps okie you need to explain "compound interest" to C.I. and meself as we are just not hep to such intimate knowledge as you possess, could you also explain such concepts as "dividends" "earnings" and most especially "capital gains"?

Don't worry, I know you don't have anything at all to learn, dys, you already know everything about everything, especially money. And even if there was one minute thing out of a thousand you don't know, I'm sure that learning it from an okie would be beneath your dignity, so I won't bother.
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Thomas
 
  1  
Reply Thu 1 May, 2008 10:56 pm
georgeob1 wrote:
With respect to your statement above -- I don't get the meaning of what you wrote. I see the point about a substandard ROI, but I don't know what you mean by "..barely any difference to the taxpayer's expenses."

Maybe "the tax payer's bottom line" would have been a better expression than "the taxpayers' expenses". The point is that if you privatized Social Security tomorrow, tax payers could expect a better return on the investments they would make instead of paying payroll taxes. But they still would have to come up with the money for the existing generation of retirees, for an overall wash from an actuarial standpoint.
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Thomas
 
  1  
Reply Thu 1 May, 2008 11:02 pm
georgeob1 wrote:
However, my impression is that, even on a revolving basis, a market return for an arbitrary period equal to the average working lives of the participants would yield something better than the bond yields, based on actual market data for the past 60 years.

I suspect that's surviver's bias. The retirees of 1940, for whom Social Security was a miraculous windfall, aren't alive to tell their stories anymore. The retirees of 2008, for whom Social Security was a mediocre to bad investment, are.
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georgeob1
 
  1  
Reply Thu 1 May, 2008 11:07 pm
True enough, but in any apples to apples comparison both the 1938 start up costs and the trailing benefit costs at the moment the the SS program is discontinued must be counted on an equitable basis - I think that means the former would be a SS program cost and the latter a cost attributable to the new system. Given the operating advantage in ROI enjoyed by a private system and an assumed rough equality in the one-time front end costs (on a constant dollar basis) there should still be a substantial net benefit under the private system - roughly equal to the annual difference in ROI - assuming both systems are operating on approximately equivalent actuarial bases.
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Thomas
 
  1  
Reply Thu 1 May, 2008 11:19 pm
georgeob1 wrote:
True enough, but in any apples to apples comparison both the 1938 start up costs and the trailing benefit costs at the moment the the SS program is discontinued must be counted on an equitable basis - I think that means the former would be a SS program cost and the latter a cost attributable to the new system.

I disagree. The trailing benefits would be a cost of the old Social Security system -- the retirees of 1940 should have paid them, but haven't, because that's how FDR designed the system. These costs are a bug, not a feature, and FDR would have been well advised to design his system differently. But now the damage is done, and it's not going away -- whether you continue the existing Social Security system (and pay the cost out of diminished return on investment) or privatize it (and pay the cost out of some tax). It's impossible not to pay the cost that FDR imposed on future generations by designing Social Security the way he did.
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georgeob1
 
  1  
Reply Thu 1 May, 2008 11:25 pm
Then, based on your choice in this matter the benefit of the privatized system is far greater than I suggested (though that aspect of the relative advantage would diminish over increased operating time with the new system).

In any event I don't agree with you on this point in that you (as I understand it) would, in effect, charge the SS system for the first generation of beneficiaries under both systems - hardly fair.
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Advocate
 
  1  
Reply Mon 5 May, 2008 03:29 pm
There may be a link between the widening income gap and the future of the economy.


ECONOMY
The Income Divide

The gap between rich and poor in the United States has widened exponentially over the past three decades. The Congressional Budget Office reports that since 1979, the average income for the bottom half of American households has grown by 6 percent. In contrast, the top 1 percent of earners have seen their incomes shoot up by a 229 percent during that same period. Under the Bush administration, the average income of most Americans has fallen, but the average income of top wage earners (those above the 95 percentile range) has increased from $324,427 in 2001 to $385,805 in 2006. Only one other year has seen a comparable income gap: 1928, the year before the Great Depression. Inequality has not been confined to one region or sector but has spread all across the country. North Carolina and Indiana, two geographically and economically disparate states whose upcoming presidential primaries have brought them to the forefront of the national media, are no exception. With the average income of the richest 20 percent of families 7.2 and 6.7 times larger than the poorest 20 percent of families, respectively, North Carolina and Indiana are a microcosm of a larger national trend. Both of these states are looking for relief from declining wages, sinking job security, and falling benefits.

WHY THE DIVIDE?: The reasons for this rise in income inequality can be split into three basic components: government policies, tremendous wage inequality, and high investment income. The federal government under Bush, which provides the fundamental rules that guide how economic gains are distributed around the country, has embraced deregulation and an unstructured financial system. Consequently, huge corporations have raked in profits while the economy sags. The administration's tax policies, which lower taxes on the wealthy rather than the middle class, have furthered the problem. As billionaire Warren Buffett explained, "The 400 of us [here] pay a lower part of our income in taxes than our receptionists do, or our cleaning ladies, for that matter. If you're in the luckiest 1 per cent of humanity, you owe it to the rest of humanity to think about the other 99 per cent." CEO pay, which has increased by 20.5 percent over just the past 12 months, dwarfs the mere 3.5 percent salary increase for American workers. To put this in perspective, the top 500 American corporate executives earned a combined total of $6.4 billion in 2007, about $12.8 million each and roughly 10 percent of all company profits. An absence of laws protecting collective bargaining has removed the leverage that unions once had on companies to increase wages quickly. Wage inequality, the shrinking value of the minimum wage, and the all-around decline in manufacturing jobs only intensify the problem. The New York Times' Steven Greenhouse explains, "A little-known secret is that, over the past seven years, the United States has lost one in five manufacturing jobs. ... Those are usually jobs that pay good wages, middle-class wages, usually provide middle-class benefits on health and pensions."



WHERE DOES THE MONEY GO?: With less money available, Americans are increasingly forced to make tough choices on how to spend their diminishing disposable incomes. Consumer spending and confidence have fallen to record low levels, causing families to skimp on discretionary spending. U.S. consumers, up until recently the most powerful force on planet Earth, are in retreat," wrote Joseph Quinlan, a chief market strategist for Bank of America. A recent report by the Bureau of Labor Statistics shows that the largest increases in consumer spending between 2006 and 2007 was on necessities: fuel, food staples, and medical bills. Not surprisingly, the largest decreases were in a newly defined category of "luxury" goods: electronics, toys, home decor and fresh fruits, and vegetables. "People are not not spending, but they are changing how they spend," said Marshal Cohen, chief analyst at the NPD Group, a consumer and retail market research organization.

HEALTH INSURANCE PERILS: The decline in the average middle class wage means that Americans who were once financially comfortable are now feeling the sting. Approximately 158 million Americans enjoy employer-provided health care benefits. More and more workers, however, are opting out of their health insurance because they simply can't afford it. The average cost of those benefits to employees has increased by $1,500 -- from $1,800 to $3,300 -- since 2001. For a middle class worker, that amount is an entire month's paycheck, which is particularly troubling as national incomes rose only one-tenth that amount during that same period. Due to a combination of bigger out-of-pocket deductibles and co-payments, higher premiums, and less extensive coverage, medical bills now account for almost one-fifth of average family income.

--americanprogressaction.org
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